A bridge loan is commonly referred to as “interim financing” or “gap financing” and is used till the borrower has acquired a more permanent form of financing. It is used to ‘bridge the gap’ and is a short-term loan (ranging from 2 weeks to a couple of years) requiring a relatively high rate of interest (12% – 15%) as a compensation for the additional risk involved, fluctuating from one state to another. The individual or business in need of interim financing pays it back once their credit score improves or they have been funded by the conventional lenders or financing institutions. Often a lower Loan-to-Value ratio (approximately 60%) and cross-collateralization may be required from the borrower. The advantages enjoyed while going in for a bridge or swing loan is that it can be had within a very short notice and does not need lengthy processing or documentation.
Bridge loans overlap or are very similar to hard money loans. The former refers to the source of the loan whereas the latter is a description of the loan duration. They are useful when a deal of commercial real estate procurement has to be closed quickly, rein in a foreclosure or while waiting for a long term financing. A bridge loan does not follow any specific standards and is applied for under unusual circumstances. It is extensively used in corporate finances and venture capital. A bridging loan ensures immediate cash flow and is therefore proves to be a blessing sometimes.
A bridge loan allows for more flexibility and its popularity is gradually increasing. It is a temporary arrangement is generally custom-tailored to fit individual needs. For the couple of weeks or months there may not be any fees to be paid which may accrue and become sizable. It is a good way to build a bridge to your dreams. The borrower has to pay an origination fee besides the interest associated with the swing loan. It can be risky for the lender since he has to often face delinquency. Most clients do not fully understand the possible perils of a bridge loan and end up in a fine mess. It is advisable to read between lines before opting to use this temporary arrangement.